US Treasurys are sliding as America heads to the polls on Election Day. Tuesday’s weakness seems to be an indication the market is pricing in a Hillary Clinton win.
In a note to clients sent out on Tuesday, Barclay’s Interest Rate Research team of Rajiv Setia, Anshul Pradhan, and Amrut Nashikkar wrote, “In the case of a Clinton victory, 10y yields may not rise much, given current levels and market positioning, though front-end yields would reprice somewhat higher to reflect greater probability of a Fed hike.”
And that is exactly what we are seeing.
Selling across the curve is concentrated up front, where yields are higher by as much as 6 basis points. Meanwhile, weakness at the long end of the curve has produced a rise of just more than 3 bps. Additionally, the odds of a 25 bp Fed rate hike in December have risen to 86% from 80% earlier this morning, according to Bloomberg data.
Here’s a look at the scoreboard as of 12:59 p.m. ET:
- 2-year ++5.0 bps at 86.8 bps
- 3-year +5.7 bps at 1.033%
- 5-year +5.5 bps at 1.343%
- 7-year +5.5 bps at 1.657%
- 10-year +4.5 bps at 1.871%
- 30-year +3.2 bps at 2.634%
While the action is taking place up front, traders are paying close attention to the long end of the curve where yields are at their highest levels since the beginning of June.
As for what a Clinton victory would mean longer-term for bond yields, Barclays says to “expect 10y yields to drift lower to about 1.7% by yearend as gridlock would remain the norm, the prospects of an easing of fiscal policy would remain low and attention would shift to the business cycle.”
And while the market is signalling Clinton, the ballots still need to be counted. The trio from Barclays says that in the event of a Trump win, “the knee-jerk reaction would likely be a risk-off move, a flight-to-quality bid in front to intermediate Treasuries, and a steeper 5s30s Treasury curve.”
However, longer-term is a little bit more difficult to predict if Trump is indeed victorious.
“If his agenda entails major fiscal stimulus, accompanied by a softer stance on anti-trade policies, we would expect a large bear-steepening sell-off; 10y yields could rise to 2-2.25%,” the team wrote. “Alternatively, if his agenda centres on trade wars with no mention of tax reform, fiscal stimulus, and other market-friendly policies, risk-off may become acute and recession probabilities could rise. 10y yields could rally to 1.4% or lower.”